SEC files securities fraud charges against state of Kansas over muni bonds and pension liabilities

The U.S. Securities and Exchange Commission said on Monday it has charged Kansas with fraud for not properly disclosing funding problems with its public pension when it held bond offerings in 2009 and 2010.

It marks the third time the federal regulator has taken action against a state for violating municipal bond disclosure rules.

Kansas, which was under investigation for four years, has already implemented reforms in how it discloses its pension liabilities and has agreed to settle the charges for its prior incomplete disclosures, without admitting or denying the charges, the SEC said.

According to the SEC, the Kansas pension system was so poorly funded that it created a repayment risk for investors holding the state's bonds, but in bond offering documents the state did not explain the existence of "the significant unfunded liability.''

Kansas also should have described how the state legislature could have to appropriate funds to cover the pension liability, thereby making less money available for spending in other areas, including debt service payments, the SEC said.

"Kansas failed to adequately disclose its multi-billion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state's finances and its ability to repay the bonds amid competing strains on the state budget,'' said LeeAnn Ghazil Gaunt, chief of the enforcement unit on municipal securities and public pensions.

The SEC charged New Jersey in 2010 and Illinois last year for not informing bond buyers of pension problems. Because federal regulators have limited power over states, the SEC in recent years has asserted a stronger influence on public retirement finances by citing states and cities for violating municipal bond disclosure rules.

Since the 2007-09 recession laid bare some pensions' shaky finances, political pressure has mounted for greater federal monitoring.

Around the time of the New Jersey charges, the commission said it began looking into the bond offerings that Kansas made in 2009 and 2010, totaling $273 million, adding that at one point the state's pension was considered the second-worst funded in the nation.

The SEC did not detail the size of the state's pension shortfall at that time.

Governor Sam Brownback, who took office in 2010, pointed to reforms passed in 2012 to boost contributions from both employers and employees, and enroll new workers in a plan resembling 401(k) accounts in the private sector.

"Under my administration, we have improved transparency in the reporting system and taken decisive actions to meet our existing obligations and maintain the trust of our state workers and retirees,'' he said.

Brownback is struggling to keep his post in upcoming elections, where the state's budget woes have taken center stage.

As of Dec. 31, 2012, the Kansas Public Employees Retirement System, or KPERS, had a shortfall of $10.3 billion, according to its annual report. The unfunded liability shrank to $9.77 billion in 2013, mostly on investment gains, it said last December.

The funded ratio was 56 percent in 2012, meaning KPERS had enough money to cover roughly half the amount promised to workers, according to the presentation. In 2013 the ratio improved to 59.9 percent.